What Are the Four Stages of the Business Cycle?

Few businesses stay static over their lifetime. Most will experience a period of growth followed by a period of stagnation, before they hit another growth period. These transitions are known as the business cycle, which consists of four distinct phases: expansion, peak, contraction and trough. You can usually tell which phase a business is in by the number of goods it is selling and whether it's hiring or firing staff. You can also use economic indicators, such as a country’s gross domestic product, to figure out which phase of the business cycle an entire country is experiencing.

The expansion phase of the business cycle represents a period of economic growth. This phase includes an increase in the number of jobs available and an increase in the cost of goods. As employers expand their ranks of employees, a corresponding increase in earned income enables working consumers to afford items produced by businesses. As demand for their products grows, businesses produce more goods during the expansion stage of the business cycle. During an expansion stage, an economy normally produces a GDP indicating high levels of efficiency.

The peak stage of the business cycle follows an expansion phase. The peak stage demonstrates the height, the pinnacle of the expansion phase. In a peak phase, an economy experiences little or no unemployment. The cost of goods continues to increase, but not as rapidly as in the expansion phase, as production levels satisfy consumers’ demand for goods almost exactly. The business cycle’s peak stage reveals a high GDP during its length. An economy’s peak stage is normally recognized after it has ended, however. Only a decrease in GDP distinguishes a peak stage from its predecessor, the expansion phase.

The contraction phase of the business cycle represents the opposite of the expansion stage. Employers cause an increase in an economy’s unemployment by reducing the number of their employees. As workers lose their jobs, earned income decreases and non-working consumers can no longer afford goods produced by businesses. An economy’s GDP will be lower during the business cycle’s contraction phase than during the cycle’s expansion and peak stages. If GDP falls for consecutive quarters, the contraction stage experienced by an economy may be a recession.

The business cycle’s trough stage directly contrasts its peak phase. During a trough stage, an economy experiences a high unemployment rate. Increases in the cost of goods do not occur as consumer demand and confidence levels remain low. Similar to a peak phase, a trough stage can only be recognized after it passes. A trough stage will be identified by a decrease in an economy’s GDP when compared with its level during the preceding contraction phase. If an economy’s GDP decreases or remains at a low level for an extended number of fiscal quarters, the economy’s trough stage may be a depression.